US economic growth weakened to 0.7 percent in first quarter

The sharp slowdown in consumer spending in the first quarter was attributed to a collection of temporary factors: warmer weather, which shrank spending on heating bills, a drop-off in auto sales after a strong fourth quarter and a delay in sending out tax refund checks, which also dampened spending.

Cuts in government spending also had an impact on economic growth.

Meanwhile, the large drag on fourth quarter growth was net exports, with economic headwinds overseas and the strong USA dollar challenging manufacturers. But with savings rising to US$814.2 billion from US$778.9 billion in the fourth quarter, consumer spending is likely to pick up. “The key will be wage gains – we need strong wage-growth support for spending going forward”.

Investors saw a 95 percent probability that the Fed would not increase rates when it next meets next week, but a 63 percent probability of an increase in June, Fed futures contracts monitored by CME Group showed on Friday.

Though only slightly below the 0.8 per cent increase in the same quarter of a year ago, the pace fell well below analyst expectations for 1.1 per cent.

United States growth slid to its lowest level in three years in the first quarter, a disappointing start to Donald Trump’s presidency on the eve of his first 100 days in office. Those decreases were partly offset by increases in exports and both nonresidential and residential fixed investment Real exports of goods and services grew 5.8 percent in the first quarter, according to BEA, compared with a 4.5 percent decrease in the fourth quarter of 2016.

Unable to meet the predictions of 1.1% made by analysts, growth in this quarter was marginally lower than that of the first quarter of 2016, which stood at 0.8%.

A separate report from the Labor Department Friday showed that its employment cost index-roughly, a proxy for wages-had its best performance in almost a decade, rising by 0.8 percent. Oxford Economics economics chief Gregory Daco predicted first-quarter growth to come in around 0.9 percent.

Economists’ forecasts for overall growth ranged from zero to 2.2 percent.

The Bureau of Economic Analysis, which prepares the GDP report, has a three-year program aimed at addressing this problem, which has been particularly problematic in the first quarter.

Ian Shepherdson of Pantheon Macroeconomics said if these distortions were excluded, growth would probably have been closer to two percent.

The first quarter showing in consumer spending was the poorest growth in that category in more than seven years.

Even though hiring has been humming along and the jobless rate of 4.5% is the lowest in nearly a decade, a sustained pickup in wage growth would help boost consumers’ ability to spend. In sum, residential and nonresidential fixed investment contributed 1.62 percentage points to headline GDP.

Business investment in inventories declined in the first quarter, to $10.3 billion from $49.6 billion.

“Imports, which are a subtraction in the calculation of GDP, increased. These industries were impacted by increases in prices”. Inventories, on the other hand, subtracted 0.9% from the growth.

Real disposable income also grew 1% in the quarter, indicating Americans had more money in their pockets to spend. The most recent jobs report, however, showed that the labor market only grew slightly with an additional 98,000 new jobs.

Inflation picked up. The price index for personal consumption expenditures – the Fed’s preferred inflation gauge – rose at a rate of 2.4% in the first quarter, the biggest jump since spring 2011.